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The Hidden Fallacies Behind Intervention

Monday, October 01, 1979

The necessity for government to intervene in the economic realm is widely accepted today. The media of communication frequently report interventionist measures in much the same manner as they do natural occurrences. Television anchor men announce the latest intervention in the same tones that weathermen predict the winds tomorrow will be westerly and blowing from 5 to 15 miles per hour. Presidents usually have an assortment of economic experts to guide them in meting out intervention. Congress passed a full employment resolution in 1946, and it has come widely to be assumed that this aim can be achieved by a variety of government measures. The chairman of the Federal Reserve Board is generally recognized as a crucial figure in government’s interventionist activity. Government subsidizes, penalizes, breaks up, restrains, limits, compels, regulates, protects, initiates, and controls economic activity in myriad ways.

Government intervention is not new to our era, of course. As far back as we have records of such activities, there are indications of the practice. It is probably safe to say, however, that never have so many different sorts of interventions been carried out simultaneously with such thoroughness and tenacity. Earlier interventions were mostly hit or miss affairs, often crude and unwieldy. Nowadays, interventionists operate with an arsenal of statistics, surveys, computers, and the technology in which we are most proficient.

What makes all this so remarkable is that prior to the last two hundred years or so, economic intervention could be ascribed mostly to ignorance. That explanation does not go down so well in our era. Great strides in economic thinking have taken place. Thinkers have focused attention upon it and as might be expected have made many important discoveries. Economics has been shaped as a precise intellectual discipline over the past two centuries. Every sort of intervention has been subjected to rigorous analysis and its consequences explored.

Economists Divided

I am not suggesting, of course, that all economists are in agreement with one another. That is decidedly not the case. Nor is it likely that in so broad and comprehensive a field they ever will be. What is strange, however, is that their deepest disagreement lies in that very area and concerns the most fundamental question with which economics has to deal. Namely, they are divided over the feasibility and workability of government intervention in economy. It is not simply that they disagree over how much intervention is wanted, which we might expect, but they disagree fundamentally over whether there should be intervention or not.

For example, here is a statement from a recent textbook on economics describing the necessity for intervention:

In this chapter and the next we turn from economic analysis to economic policy. Our concern will be with government measures that promote full employment, encourage growth, and prevent inflation or deflation. We have seen that an economic system like ours, when left to itself, sooner or later either becomes overstimulated . . . or loses some of its momentum. . . . How to prevent an enterprise economy from “slipping off the track” is perhaps the most important problem in applied economics today.’

One of the ways that government may effectively intervene, he says, is by monetary policy:

Monetary policy is the course of action pursued by the central bank authority. In the United States it consists mainly of the way the Federal Reserve uses its three main controls. . . .

If used skillfully this set of controls can be very helpful in keeping the economy on an even keel. The difficult thing is to learn the art of using them skillfully—the art of monetary policy.2

By contrast, here are statements by other economists on the impact of intervention. In a classic work on the subject, the late Ludwig von Mises put it this way:

However, all the methods of interventionism are doomed to failure. This means: the interventionist measures must needs result in conditions which from the point of view of their own advocates are more unsatisfactory than the previous state of affairs they were designed to alter. These policies are therefore contrary to purpose.3

Milton Friedman has these comments on various interventionist measures in the United States:

Is it an accident that so many of the governmental reforms of recent decades have gone awry, that the bright hopes have turned to ashes?

I believe the answer is clearly in the negative. The central defect of these measures is that they seek through government to force people to act against their own immediate interests. . . .4

In short, there are interventionists and non-interventionists. It is as if physicians were divided between the position of Christian Scientists, for example, and that which the medical profession in general holds toward disease. Such clear-cut differences suggest differences in premises. It is well, then, to turn to the tacit premises of interventionists.

The idea that government can intervene to good effect in the market is based on analogy. In the first quotation above analogy was twice used to suggest what was being done. The first referred to economy as if it were a train that could be kept from “slipping off the track.” The next compares it to a boat which must be somehow kept on an “even keel.” A paragraph or so further on the same writer likens what the Federal Reserve is supposed to do to depressing the accelerator or brakes in an automobile. It may be best, however, to abandon these analogies drawn from transportation, to which this writer appears to have a bent, and get to the fundamental conception.

Outside Guidance

The basic idea from which intervention derives its animus is that the market and economy require the action of an outside agent in order to function well. Experience is replete with analogues for this belief. The basic idea is one of effecting cures or making repairs by intervening in systems. It is the idea that when things are out of kilter you fix them by making alterations. It is one of man’s basic ways of fronting and dealing with the world about him.

The root idea of intervention can be simply illustrated from medical practice. Physicians and surgeons perform their services most often by intervening in the human system. They intervene in order to kill some infecting agent, to remove some obstruction, to correct some defect, and the like. Surgeons intervene by performing operations: setting bones, cutting out diseased tissues or organs, or repairing something. Physicians introduce foreign substances into the system, usually orally or by injection. While all these interventions are more or less dangerous and potentially harmful, they are for the purpose of healing. Similar practices in veterinary medicine further reinforce the concept of remedial intervention.

Mechanics perform analogously on machines. They do not intervene so drastically as doctors do—machines being often constructed so that they can be worked on easily—but the conception of the good intervention receives support from their work. They may remove engines to work on them or take whole machines apart. Only rarely are “foreign” substances introduced into machines during repair, but if they are they are usually removed before the repair is complete.

Indeed, the intervention to improve or correct is so commonplace that examples abound. Most servicemen are interventionists: plumbers, electricians, television repairmen, tree “surgeons,” landscapers, house remodelers, and so on. Auditors intervene in accounting systems in quest of weaknesses or chicanery. Efficiency experts intervene in the productive process to save time and energy. Tailors alter clothes; cooks add seasoning to their dishes; authors rewrite their scripts; and farmers mend their fences.

Indeed, there are universal truths which make expedient these interventions to heal, repair, mend, and correct. All physical things decay; bodies become diseased; parts wear out; and human beings are imperfect. Intervention in bodies, systems, organizations, and products is man’s way of ameliorating, for a time, the universal decay and imperfection. Although we do not ordinarily think of most of these efforts as intervention they nonetheless undergird the general concept and provide examples of the worthwhile and useful intervention.

There is an important result that is essential to what I shall call the good intervention. Indeed, when phrased as a question it is the definitive test of the good intervention. As a result of the intervention, Is independence of the intervenor reestablished? The purpose of medical intervention is to heal the patient. It is to get him back on his feet, to get him functioning normally, to have him able to look after himself, to make him as nearly independent as possible given his circumstances. The purpose of mechanical intervention is to restore the machine to working order. The norm for the good intervention is that there comes a point when the intervenor is no longer needed. The doctor dismisses his patient. The mechanic announces that the automobile is ready to go. The plumber declares that the pipes are unclogged and that the water system now works. Independence of the intervenor has been accomplished. (Not all “good” interventions have these happy results, but that is the norm for them and the end for which they were undertaken.)

Fixing the Economy

The idea of government intervention in the market and economy derives its motive force from this character of part of the universe and man’s way of dealing with it. The notion that it is good and desirable arises from the known types of good interventions. Underlying this is the notion the market and economy suffer from some defect, infelicity, disharmony, or harmful tendency which stand in need of correction.

Many supposed defects have been highlighted over the years. Some have held that private property in land introduced fundamental injustices in the economy. Others have held that workers do not receive their proper share of the fruits of production in the market. Unemployment has been ascribed to a defect in economy. The disparity between farm and industrial income has been attributed to market weaknesses. Here are some of the difficulties arising from the market and economy as described in a recent textbook. The author refers to them as problems:

What are these problems? For capitalism, we have but to refer to the micro and macro sections of this text. Disequilibrium, instability, misallocation of resources, and inequality of incomes are results of the economic process in every society in which there is private ownership of property and a market determination of prices. Whether we look to Japan or Sweden, the Union of South Africa or the United States, we see similar tendencies toward too much or too little growth, inflation or unemployment, a struggle between the private and public sector, and a highly uneven division of incomes between the property-owning and the working classes. These are problems as specific to capitalism as the problems of guild life were specific to feudalism.6

It is such problems, then, that government intervention is supposed to solve. Such economies are, so to speak, sick, broken down, not working properly, in need of healing, repairing, mending, altering, or what have you. They need, we might suppose, to be restored to proper working order according to prescription administered by government. They need, we might further suppose, to be got back on their feet, to be made to work well independently of the intervenor once again.

But is that how government intervention in economies works? Does it straighten out what is wrong so that economy will work well on its own? There is no evidence to that effect. On the contrary, intervention neither corrects the alleged defects nor restores the independence of anything. Mises described the matter succinctly some years ago:

What these people fail to realize is that the various measures they suggest are not capable of bringing about the beneficial results aimed at. . . . If the government, faced with this failure of its first intervention, is not prepared to undo it . . ., it must add to its first measure more and more regulations and restrictions.’

Perpetual Dependency

This pattern has been amply demonstrated in American history. The railroad industry is a striking example of how such intervention leads to perpetual dependency on government. When the Federal government first began to regulate the railroads by the Interstate Commerce Act in 1887 its aim was to prevent monopolistic abuses and promote competition among the lines.. After the passage of the Esch-Cummins act in 1920 about the only competition permitted between railroads was in service. But rates became so closely tied to profits that before long railroads were vying with one another in reducing services. Since profits were, in effect, restricted, the railroads sought to perform only those services with the least risk and effort entailed. This tendency was further aggravated by the fact that government subsidized or supported alternative modes of transportation.

The railroads became increasingly dependent on government. They depended on government for rate increases, for opening new lines, for closing old ones, for dropping or adding service, and for the rules under which they could operate. They have become almost entirely dependent for the operation of passenger trains, since most passenger service is now provided by AMTRAK. CONRAIL is in the freight business, and several eastern lines have lost most of what remained of their independence. Innovations can be made usually only after lengthy and widespread hearings. Even new types of cars must be subjected to examination to determine what impact their usewould have on alternative types of transportation.

Another example of government intervention which established dependency on government was the Social Security Act of 1935, and later changes in it. The main purpose of the act was through special taxes to build up a fund through which benefits could be obtained on retirement. In theory, the individual might be relatively independent with this income. In fact, the individual relying on Social Security payments is entirely dependent upon government for what he gets. He has no claim on what he has paid in. He will only receive such payments as Congress decides from time to time he may have.

But everyone is drawn into a circle of dependency on government by the intervention in the money supply. Although there were earlier and have been other interventions, the crucial one in the twentieth century has stemmed from the Federal Reserve Act of 1913. The Pujo Committee Report (from the House Committee on Banking and Currency), issued in February of 1913, detailed a concentrated control over money in the United States by a few New York banks. This concentration, the Committee alleged, had come about as a result of bank consolidation, interlocking directorates, and bank control of insurance companies, railroads, and utilities. The Report provided the most immediate thrust for the passage of the Federal Reserve Act a little later in the year.

The Federal Reserve in Theory and Practice

The Federal Reserve system was supposed to break up this alleged concentrated control of money and the dependence of the country on a few New York banks. Twelve Federal Reserve banks were set up, each to cover a different region of the country. They were authorized to issue bank notes and discount commercial paper, among other things. In short, they were given power to increase and decrease the money supply. Since the notes of these banks were legal tender, and since the banks have greatly increased the amount of their issues over the years, they became the currency of the United States, and even silver coins were eventually driven out of circulation. (Bad money drives out good when it is supported by tender laws.)

Whatever the case may have been for the dependence of the country on a few large banks, there can be no doubt that the people of the United States are now dependent on the actions of Federal Reserve banks. When they increase the money supply, the value of everyone’s money declines. Many institutions and organizations have become dependent on the surges of inflation in order to operate. Labor unions depend on increases in the money supply to get continual money raises for their members. Inflation fuels the expansion of industries. Since money no longer serves effectively as a store of value people cast about in many directions in the quest for something that will be. The “Fed” cannot control the economy with any precision, but it can, and does, take away the stability of prices by which people might manage their own affairs.

The persistent belief in the efficacy of government intervention—in the face of all the reason and evidence to the contrary—rests on two false analogies. The first is a misconception of the nature of government. The second is a misconception of the nature of the market and economy. Let us turn first to the false analogy about government.

Government Is Force

Government is not analogous to a physician, a surgeon, a veterinarian, a mechanic, a plumber, a tailor, or a repairman. It has no healing in its wings. It cannot heal, mend, repair, alter, or otherwise fix things. It is that organization with the monopoly of the use of force in a given jurisdiction. It can only be effectively used in the ways that force can be used.

If we must conceive of government on analogy with some job or function, we had best choose one that fits it. Analogous figures by which government may be personified are: soldier, policeman, jailer, judge, tax collector, law maker, foreign diplomat, and executioner. Although opinions will differ as to which is the best for personifying government, my preference is jailer. Jailer captures the essence of government for me. He locks up, confines, obstructs, prohibits, restrains, and orders around those in his keeping. That is essentially what government can do by the use of force. His instruments are guns, blackjacks, handcuffs, straitjackets, cells, and bars. Compulsion is his mode of operation. The jailer is government in the final analysis; those who would know a particular government should learn of it first of all by visiting its jails and prisons, if they can do so.

None of this is said in derogation of government. Government is necessary because in every jurisdiction there will either be a monopoly of the use of force or a contest over it. The contest over it is undesirable because the appeals to arms toward which it tends is civil war. More, government’s task is an honorable one. It is to keep the peace. It does so by monopolizing the use of force, punishing violators, and settling disputes. It is well that men should stand in awe of those who govern, that they should be fitted with such trappings of office as will command respect, and that contests with government authorities be verbal and carried on within a framework of ritual. But it will never do to forget that beneath the velvet glove of government is the mailed fist. That mailed fist cannot heal or mend; it can only be used to force people to some course of action against their will.

The Body Politic

The other fallacy arises by conceiving of the market or economy as analogous to the human body, to machines, to organizations, to physical objects, or to manmade devices. The market and economy do not belong to that order of being which breaks down, wears out, rusts, corrodes, is diseased, decays, warps, gets stopped up, gets out of kilter, or what have you. They do not stand in need of medication, surgery, oiling, greasing, stimulating, dilating, altering, adjusting, repairing, auditing, or even the ministrations of efficiency experts.

The market and economy belong to the natural order. They are analogous to gravity, the speed of sound and light, buoyancy, action and reaction, and molecular structure. But they are different from these in one highly significant way. There is an order for things and an order for man. The law of gravity, for example, is a part of the order for things. The market and economy belong to the order for man. Man as a physical object is, of course, subject to the law of gravity, but he is not an active participant in it. By contrast, man is an acting participant in the market and economy by way of his reason, volition, morality, and the use of his faculties. Man cannot alter the nature of the market and economy, but he can disrupt, distort, and obstruct their operation. He can use them or abuse them. They are a part of the moral framework within which he lives, and he may choose his course but not the consequences of it. That is the order for man.

The essential feature of the market is this. It consists of those exchanges which take place when willing buyers and willing sellers meet. The essential feature of economy is this. It is what takes place when men in the pursuit of their own interests employ their resources so as to produce those goods that are most wanted with the least use of scarce land, labor, and capital. Economy is the reasonable means available to man to deal with the condition of scarcity which he confronts. The market is the social way for man to dispose of his surplus and acquire what he most wants from others.

Voluntary Exchange

Force is anathema to the market. There is no market without a willing buyer and willing seller. The law of contract recognizes this character of exchanges. If either the buyer or seller uses force, i.e., violence, intimidation, or fraud, there is no agreement, and no valid exchange has taken place. One of the primary functions of government is to exclude force from the market and to provide recourse for those on whom it has been used.

Force is either irrelevant to or disruptive of economy. Man is naturally bent to pursue his own interest by using as little as possible of what he has to get the most of what he wants. If he cannot employ force in doing this, there is no alternative to economy. Government is as irrelevant to economy as it is to the working of the law of gravity. Water will run down hill whether there is positive law to that effect or not. So will men behave economically.

None of this is meant to imply that government cannot act upon the market or economy or that its acts will not have impact. Clearly, the opposite is the case. Government can act, and its actions will have consequences. There are three broad ways in which government can act on the market and economy.

First, it can act in order to exclude force from the market and to settle disputes arising there. As already noted, this is a primary function of government and essential to the market. When government acts in this way it is acting profoundly in accord with its nature as a monopolist of force. The useof force by private parties is a challenge to government’s monopoly. By settling disputes government is acting to maintain the peace. Government action to provide access to markets is an extension of the above functions.

Second, government can prohibit certain kinds or classes of exchanges. Examples with which Americans have been familiar from time to time and place to place would be prostitution, prohibition of the sale of alcoholic beverages, gambling, drugs, the showing of Sunday movies, and so on. If such prohibitions succeed, the effect would be that there would be no market for what is prohibited. That is rarely the result, however. If what is prohibited is wanted very strongly a market is developed and exchanges are made. It is not a free market, of course. It is sometimes called a black market, but it would be much more precise to call it a criminal market.

Legally, government cannot perform its normal function in this market. It cannot exclude the private use of force. It cannot maintain the peace. It cannot settle disputes. At law, no market exists; in its stead, there is criminal activity. Two things are characteristic of this market. Prices are much higher than in a free market because the supply may have been artificially reduced by the prohibition and because the dangers (both from the private use of force and from government punishment) must be compensated by the potentiality of high profits. The other is that force—crime—is rampant in this market: extortion, violence, bribery, and even gang warfare. When government prohibits exchanges in goods that are in considerable demand it necessarily excludes itself from performing its primary functions in any market that may develop. The rule of crime replaces the rule of law in such markets.

Third, the government can act upon the market and economy by intervention. Government intervention occurs when the government becomes an active participant in the market. There are thousands of ways to go about such intervention. The government may sell goods in competition with private sellers, be the only seller (have a monopoly), set minimum or maximum prices, establish quality controls, increase or diminish the money supply, levy taxes, limit access, empower certain groups, lay down rules as to when and where various types of exchanges may take place, give subsidies or pay bounties for production, penalize the buying of some goods, offer goods below the market price, require licenses, compel service, regulate, restrict, inhibit, control, and attempt to manage the economy.

Consequences of Intervention

What happens when government intervenes in the economy? A great many things, obviously. Force is intruded into the activities. Government becomes a participant, is an interested party, and is no longer qualified to perform its function of settling disputes. Quite often, it has great difficulty in maintaining the peace because it has become a party to disturbing the peace. All sorts of distortions, disruptions, and obstructions occur; generally, the more intensive and extensive the interventions the greater these are.

Government intervention is a kind of self-fulfilling prophecy. It is premised on the notion that the market and economy are out of kilter and require the ministrations of a benevolent government. As soon as government begins to intervene, they do get out of kilter; it does introduce defects into whatever market or economy it intrudes. Each intervention sets the stage for an endless round of further interventions in the futile effort to bring the whole back into balance. Mises gives us an example of how this would work if government attempted to lower the price of milk for children. If the price is fixed below the market level, he says, there will be less milk available because many producers would lose money at that price. The government would then be faced with this alternative: either to refrain from any endeavours to control prices, or to add to its first measure a second one, i.e., to fix the prices of the factors of production necessary for the production of milk. Then the same story repeats itself on a remoter plane: the government has again to fix the prices of the factors of production necessary for the production of those factors of production which are needed for the production of milk. Thus the government has to go further and further, fixing the prices of all the factors of production—both human (labour) and material—and forcing every entrepreneur and every worker to continue work at these prices and wages.8

When looked at this way, we can see why what may be called the dependency syndrome arises from government intervention. When government intervention has proceeded very far, everyone involved in the market and economy becomes dependent upon government intervention on their behalf. If not, they will suffer from the imbalance thus produced. But since balance is never achieved, there must be continual adjustments.

It is as if one went to a physician seeking a cure and instead was given drugs which were habit forming and the dosage had to be continually adjusted and increased. It is as if one took an automobile to a mechanic and instead of fixing it he added parts which had to be continually adjusted by an expert in order for the vehicle to run. It is as if I called a plumber and instead of removing the obstruction from the pipes he declared that the difficulty lay in the fact that my system depended upon water running down hill. He might then introduce an extensive plumbing system to pump my waste upward out of the house. But that one would come into conflict with the direction of the fresh water supply, so that adjustment after adjustment would have to be made, all to no avail.

These are, of course, but poor analogies. The market and economy are not like unto human bodies, automobiles, plumbing systems, or organizations. They are the natural order by which production and tradecan lead to prosperity. They are people producing and trading peacefully. Any attempt to alter it can only be done by attempting to change people. There is no body of evidence that shows this can be done to good effect where the natural order for man is involved.

Intervention, then, proceeds on the basis of two fallacies. One is a misconception of the nature of government. The other is a misconception of the nature of the market and economy. No one is likely to make these errors when he keeps clearly in mind that government can be personified as a jailer, that the market consists of that order within which willing exchanges are made, and that economy is simply using as little of one’s scarce materials to get the most of what is wanted.

Clarence Carson (1926-2003) was a historian who taught at Eaton College, Grove City College, and Hillsdale College. His primary publication venue was the Foundation for Economic Education. Among his many works is the six-volume A Basic History of the United States.